RBI to kickstart IIBs on June 4

Move meant to discourage gold buying

Come June 4, the Reserve Bank of India (RBI) will launch Inflation-Indexed bonds (IIBs) aimed to protect savings of poor and middle classes from inflation and discourage investments in gold.

In a statement issued on Wednesday, the apex bank said, “RBI, in consultation with the Government of India, has decided to launch IIBs every month to attract household savings of anywhere between Rs 12,000 to Rs 15,000 crore in the current financial year (2013-14).”

However, the first tranche of the IIBs in the current fiscal is for Rs 1,000-2,000 crore to be issued on June 4, and the maturity period of these bonds will be 10 years.  After the first tranche, bonds will be issued on last Tuesday of every month, the statement added.

Divulging details on the first series of IIBs, RBI also clarified that the coupon rate (interest rate) will remain fixed, but the principal amount invested in the bonds will be linked to inflation based on Wholesale Price Index (WPI).

"Thus, these bonds provide inflation protection to both principal and coupon payment. At maturity, the adjusted principal or the face value, whichever is higher, will be paid," RBI added. While the first series of the bonds will be open for all class of investors, the second series issue, starting October will be earmarked exclusively for retail investors.

In this context, RBI said the bonds are pursuant to the Budget proposal to "introduce instruments that will protect savings of poor and middle classes from inflation and incentives household sector to save in financial instruments rather than buy gold".

Both the government as well as the RBI are concerned over the rising gold imports as its putting pressure on Current Account Deficit (CAD), which widened to historic high of 6.7 per cent in third quarter of 2012-13.

It may be noted that gold and silver imports last month shot up 138 per cent, year-on-year, to $7.5 billion.

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